210. Memorandum From Stephen Danzansky of the National Security Council Staff to the President’s Deputy Assistant for National Security Affairs (Powell)1
Washington, February 17, 1987
SUBJECT
- IEP Shultz/Baker/Carlucci Breakfast—February 13, 1987
The following issues were discussed:
[Omitted here is discussion of Polish sanctions.]
AFRICAN DEBT—
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- McPherson discussed at some length the troublesome issue of African debt. He indicated that there was little likelihood that most of the debtor nations, especially in Sub-Saharan Africa would be able to make payments and that we ought to be looking at creative ways to address that problem since most of this debt would never be repaid.
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- Both Shultz and Baker lamented that at a time when we were finally moving the LLDCs away from statism to market economic systems and theory, we have so little money available to be of real help to them.
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- McPherson then discussed various possibilities like selling IMF gold to create facilities (or deepen existing funds) for African LLDC debt. Baker quickly discounted that idea indicating that there was only so much the Congress could absorb in one year by way of contribution to multilateral institutions. We have IDA VIII on this year’s agenda; next year it will be IBRD GCI (General Capital Increase). We cannot add to that a quota increase for IMF.
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- Shultz said that what we need in these institutions is some sort of loan loss reserve to deal with the matter of unpaid debt. He suggested that perhaps an Assistant or Deputy Assistant Secretary level working group should be charged to wrestle with Africa.
[Omitted here is discussion of the Africa Hunger Initiative, Egypt FMS, and export controls.]
DEBT–GENERAL
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- Shultz asked about the recent reporting from Brazil and other large South American debtor nations suggesting unilateral payment moratoriums, cartels and the like.
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- Darman responded that the Treasury approach to the matter would continue to be to manage each problem on a case-by-case basis without resorting to any earth-shattering, broadly applicable debt-reduction rules (Bradley Plan) which would threaten the flexibility of the present approach and set back the reforms already evident from conditionality.
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- Whitehead agreed that the present “muddle through” approach, while not terribly romantic, is the only way out. He did suggest that we ought to pay as much attention as possible to debt-equity swaps and described in some detail the Shearson-American Express Philippine Fund Plan whereunder $200 million (with 50% OPIC insurance) of bank debt would be converted into shares in a mutual fund which would convert the $ debt into pesos and purchase Philippine government and private businesses, install management therein and create a well-managed economic base.
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- Darman then set forth
Treasury’s view of the game plan for managing the various country
accounts as follows:
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- Mexico . . . should be finished first
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- Ecuador, the Philippines and Chile . . . should follow
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- Brazil and Argentina . . . would then be tackled
Darman felt that the Mexican, Ecuadorian and Philippine situations should be resolvable in reasonably short order. Brazil and Argentina will require special care and skill.
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- Darman then mentioned that Treasury was looking hard at what to do with the smaller U.S. banks who had invested in the international debt markets in the past but who were intimidated by the big guys from staying in any longer. For political and fiscal reasons these banks needed encouragement to stay and Treasury was working up a plan to give them workable “packages” of options from which they might choose to keep them in the business. More on this as things develop.
- Source: Reagan Library, Stephen Farrar Files, 1987–1988 International Economic Affairs Directorate Outline File, IEP Breakfasts 02/12/1987–04/23/1987; NLR–177–4–33–2–3. No classification marking. Sent for information. Copies were sent to Green, Pearson, and Rodman.↩